Prop. 86 a tax increase nonstarter

As we detailed in an editorial yesterday, Proposition 86's backers are touting it as funding $2.1 billion in new health-care programs that, among other things, would reduce smoking, especially among youth, and help Californians live longer by fighting cancer and lung disease. Today we will focus on the tax and a significant likely fallout of the initiative, cigarette smuggling.

What has been downplayed so far is that Prop. 86 likely would spawn a vast black market in cigarettes by increasing taxes $2.60 a pack. Already, California cigarette taxes are 87 cents a pack, 23rd highest of the 50 states, to fund such things as the California First 5 programs for young children.

The new tax would increase total taxes per pack to $3.47, highest in the nation, higher even than in New York City, where a city tax doubles the cigarette tax there to $3. A carton of cigarettes in California would cost about $70.

The legislative analyst's report on Prop. 86 found that the "price increase is likely to result in consumers reducing the quantity of taxable tobacco products that they purchase" in California and turning to other sources, such as "through Internet purchases or purchases of smuggled products."

A decline in smokers is predicted, but the degree is unclear, in part because the tax increase is unprecedented. Will it change smoking behavior or simply cause smokers to look for alternative places to buy?

When New York City increased its 8-cent city tax to $1.50 in 2002 (on top of $1.50 in state taxes), sales in NYC dropped by half within three months, and stayed at about those low rates, Patrick Fleenor, chief economist at the Tax Foundation, told us. From 2002 to 2004, cigarette use by NYC adults dropped to 20 percent from 22.4 percent. So purchases dropped a lot faster than did use.

Meanwhile, from 2002 to 2004, taxed cigarette purchases rose in the low-tax tobacco states of Virginia, to 719.7 million packs from 662.1 packs, and in Kentucky, to 718.3 million packs from 572.5 - even though cigarette use in both states also dropped. This indicated that the increase in purchases ended up in other states. However, Mr. Fleenor pointed out that the states around New York - New Jersey and Connecticut - also increased cigarette taxes in recent years, so much of the Virginia and Kentucky increases may have come from those states instead of New York City. But he said it seems reasonable that a good portion of the sales increase in the low-tobacco-tax states came from New York City.

California isn't as geographically close as New York is to Kentucky or Virginia. But it's not hard to see how people taking trips to Nevada will stock up on cigarettes there, where the tax is 80 cents a pack, for themselves and their friends. And the Mexican border is porous not only to people, but goods.

When we asked about these problems, Yes on 86 spokesperson Maria Robles told us that the initiative includes $18.3 million to enhance enforcement efforts. She added that "the benefits of all the great things this will do outweigh the problems. Prop. 86 will save hundreds of thousands of lives" as well as health care costs associated with smoking.

But Californians won't know about the enforcement situation unless Prop. 86 is passed and gives this state smoke prices even higher than those in New York City.

"This is the tyranny of the majority, which Ben Franklin warned against," Reed Royalty, president of the Orange County Taxpayers Association, told us. If Prop. 86 passes, "the majority is imposing a tax on a minority, in this case, smokers," who in 2004 made up just 14 percent of adults. He said that the hospital industry, which would receive much of the tax money, "is ganging up on smokers, who are unpopular."

And successful tax increases this year would beget attempts to increase taxes in 2008, 2010 and beyond. California's reputation as anti-taxpayer Taxifornia would return with a vengeance, discouraging investors and job creators and damaging the state's overall economy.

As we pointed out yesterday, if these health programs are so essential, they should be handled through the state's general fund in competition with all the other needs of the state. California taxpayers' pockets are not bottomless. California does not need higher taxes or a new black market in cigarette sales. On Prop. 86, we recommend a No vote.

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